Hong Kong does not have capital gain tax and under usual circumstances gains from disposal of property are not subject to tax.
Under Hong Kong tax law, “profits arising from the sale of capital assets” are outside the scope of charge for profits tax. Therefore, if the property sold is a capital asset, the profit arrived from the disposal will not be subject to tax. On the other hand, if the purchase and sale of property was trade, the profit will be assessable to profits tax.
In determining whether an asset was acquired as a capital asset or trading stock, the Revenue will look at (1) the taxpayer’s intention at the time of the acquisition; and consider (2) whether the taxpayer had engaged an adventure in the nature of trade. Generally, if the taxpayer bought a property and resold it within a short period, say, within 2 years, it is more likely that the Revenue will hold the profit is subject to tax. However, long holding period is not a decisive factor.
In ChinaChem Investment Co. Ltd v. CIR (1987) 2 HKTC 261, the properties in question had been held for substantial periods, in some instances for as long as 15 years and had generally been let throughout. The court held that these might indicate the taxpayer was waiting for a “favorable opportunity to sell” and the lettings would be more beneficial than sales within the letting periods.
To ascertain the taxpayer’s intention, the Revenue will examine all the surrounding circumstances to see if the professed intention of the taxpayer is genuinely held. In considering whether there is an adventure in the nature of trade, the Revenue will see if badges of trade exists, such as frequently engaged in similar transactions; held the asset or commodity for a lengthy period; add re-sale value to the asset by additions or repair; and etc. This indicates an intention to trade or, perhaps, the carrying on of a trade. For example, what was the source of finance of the transaction? If money was borrowed in short term, that could be a pointer towards an intention to buy the property with a view to resell in the short term. Then, it is a trade and the profit thereof is subject to tax.
There is no exhaustive list for the above criteria. The burden of proof is on the taxpayer. In Case No. D53/06, the taxpayer bought a property still in construction at HK$4.43 million and sold it at about HK$6.48 million 16 months later before the construction completed. The crux of the taxpayer’s reason for wanting to sell the property was that she was worried about the great inconvenience which her mother would have to suffer because of hoardings and the big detour by taking shuttle bus to the MTR station nearby. The Board of Review accepted the taxpayer’s evidence and found that she did intend to acquire the property as residence, a capital asset. The gain on disposal was not subject to tax.